African Insights: UK parent company liability

Under English law, in certain circumstances a parent company can be held directly responsible for loss and damage suffered by third parties as a result of its subsidiaries’ acts or omissions.

In two cases in the last 18 months, claimant groups from sub-Saharan jurisdictions have sought to take advantage of this principle in order to have their claims heard before the English Courts and to seek to hold UK-domiciled parent companies responsible for the acts or omissions of their sub-Saharan subsidiaries.

One claim failed at first instance and on appeal on its specific facts, but the principles underlying such claims and the circumstances in which such claims may succeed have been clarified by the Court of Appeal. The second claim also failed at first instance on its facts, but was heard on appeal in April 2018 and judgment from the Court of Appeal is awaited.

The Shell case

In Okpabi & Others v Royal Dutch Shell plc and Shell Petroleum Development Company of Nigeria Ltd, a group of Nigerian citizens brought claims in the English Courts against the ultimate holding company of the Shell Group and its Nigerian subsidiary in respect of pollution and environmental damage caused by oil spills.

To establish that the English Courts had jurisdiction to hear the claims against the Nigerian subsidiary, the claimants needed to show that there was “a real issue which it was reasonable for the Court to try”. To do so, they needed to establish that the UK parent company owed them a duty of care in respect of the acts / omissions of the Nigerian subsidiary. This required the Court to apply the three-fold test in Caparo Industries v Dickman to determine whether to impose a duty of care, namely:

whether the damage was foreseeable;

whether there was a relationship of “proximity or neighbourhood” between the UK-domiciled parent and the Nigerian claimants; and

whether it was “fair, just and reasonable” to impose a duty.

At first instance, the Court held that, on the facts, the second and third limbs of the test were not fulfilled.

In applying the second and third limb tests, the Court considered the factors identified in Chandler v Cape Plc, which indicate that a duty of care is more likely to be imposed where:

the parent and subsidiary operate the same business;

the parent has an in-depth knowledge of its subsidiary’s systems of work;

the parent has superior or specialist knowledge compared to the subsidiary; and

the parent knows that the subsidiary is relying on it to protect the claimants.

Notably, the Court clarified that although a claim of this kind against a parent company is more likely to succeed if advanced by employees (or former employees) of the subsidiary, claims made by individuals with no employment connection may still succeed.

The Court also said that a duty of care would be more likely to arise where a parent has fewer subsidiaries (Shell had 1,367) and does more than merely hold shares - for example, where the parent makes operational decisions.

The claimants appealed the decision, but the Court of Appeal dismissed the appeal by a majority of 2:1, confirming that there was insufficient proximity between the UK parent company and the Nigerian claimants given the lack of control by the UK parent over the Nigerian subsidiary’s operations.

The Court of Appeal also confirmed that it would not be fair, just and reasonable to impose a duty of care on the UK parent in the circumstances of the case.

The Unilever case

In AAA & Others v Unilever Plc & Unilever Tea Kenya Ltd, proceedings were issued in England against Unilever Plc and its Kenyan-incorporated subsidiary by employees of the subsidiary who had suffered brutal violence at the hands of criminal third parties whilst living and working on the subsidiary’s tea plantation. The claimants argued that both defendant companies should have done more to keep them safe.

The defendants challenged the jurisdiction of the English Courts, arguing that the claim against the UK parent had only been brought in order for the claimants to pursue their claims against its subsidiary in England, when those claims should properly be heard in Kenya and the English Courts did not have jurisdiction over the Kenyan subsidiary.

To determine that point, the Court had to consider essentially the same question as in the Shell case i.e. whether there was a real issue to be tried between the Kenyan claimants and the UK parent company. This in turn required the Court to look at whether a duty of care was owed by the UK parent company to the Kenyan claimants.

The Court determined on the facts that the particular harm suffered by the claimants was unforeseeable - nothing comparable had ever happened on the subsidiary’s land before and the acts were those of criminal third parties. Therefore, the claim did not meet even the first limb of the Caparo Industries test, and there was no issue to be tried between the UK parent company and the Kenyan claimants.

This decision has been appealed and the Court of Appeal’s judgment is awaited. We will provide a further update once the judgment is reported.

Some thoughts

These cases confirm that a UK parent will only be liable for the actions / omissions of its subsidiaries in limited circumstances. Claims in respect of the acts or omissions of overseas subsidiaries in particular may be less likely to succeed given the need for claimants to show foreseeability of loss and proximity between themselves and the UK-based parent.

From a practical perspective, the risk of a successful claim can be reduced further by ensuring that, wherever viable, corporates maintain a clear division between operational activities throughout the group, including overseas subsidiaries.

In addition, the cases show that if a UK parent company is in any way involved with the operational activities of any of its African subsidiaries, then it is important to ensure ‎that the parent properly understands the operational risks of the subsidiary and puts in place adequate practices to seek to avoid them.

Both cases show an interesting tactical trend towards asserting claims against UK-domiciled parent companies in order to bring claims against their overseas subsidiaries before the English Courts, instead of confining such claims to the local courts.

If faced with such claims, it is essential that both UK parents and their overseas subsidiaries take proper advice before providing even an initial response, to avoid inadvertently waiving rights or scuppering jurisdictional arguments.

Finally, it is important to be aware that notwithstanding the English common law principles discussed above, a parent company might also be liable in respect of the actions of its subsidiaries under certain UK statutory regimes. UK parent companies should be especially aware of the extra-territorial reach of the Proceeds of Crime Act 2002, the Bribery Act 2010 and the corporate offence of failure to prevent the facilitation of tax evasion under the Criminal Finances Act 2017.